The Birth of MAGA
Tuesday’s news of port workers on the Eastern and Gulf Coasts of the U.S. hit markets a bit, with the SPX down almost -1%, but there has been no follow through the last couple of days. Investors are still jazzed about the Fed cutting rates, so the market has yet to price in any negative outcome. Analysis and commentary about how an extended strike will affect the U.S. economy, and whether it could pull us into a recession has been all over the news. The short answer to that is yes. If this strike lasts more than a few weeks, it could have a substantial effect on the economy, and possibly tip the U.S. into a recession. There is plenty more to be said on the subject, and it will be, but as the title suggests, that’s not the focus of this post.
For those not living under a rock, it is obvious that a major political shift has occurred in the United States this last decade. A generic term that has been used to describe the MAGA grassroots movement is populism. It’s an appeal to “regular people” who feel they have been taken advantage of by “the elites”. Its principal fuel is anger, and a large minority of Americans seem ready to rip apart the current political framework, and move the country toward authoritarianism. They feel that the country is so screwed up that the only way to return it to “greatness” (however they define it) is to elect a leader who vows to burn it all down. America’s founders were quite wary of these type of political movements. One of the primary forebears of our country, James Madison, prominently addressed this danger in his writings. There are a number of drivers that have ignited MAGA - demographic, geographic, and cultural, but since the Devil’s Advocate focuses primarily on economic and financial analysis, we’re going to put all that aside for now to flesh out the economic implications.
Technology
Since the 1970s, there have been several persistent trends that have wreaked havoc on rural Americans and blue-collar workers. The most disruptive is technological advancement. Automation has reduced blue-collar jobs and increased income inequality for the last 40+ years. An MIT study shows that 50-70% of income inequality can be traced to automation. Basic economic theory holds that improved technology raises standards of living in an economy, as workers move up the value chain, and become more productive. However, factory workers can’t feed their families with economic theory. Most manufacturing workers who have lost their jobs cannot find jobs that pay nearly what they were previously earning, and this will not be remedied anytime soon.
While the economy does benefit from rising productivity, a greater share of the gains from automation in the last few decades have gone to the owners, which has created greater income inequality over time. Economic progress always creates winners and losers, there’s no escaping that, but it’s safe to say the losers are pissed, and it has become obvious that this will have serious longer-term consequences.
Weakening of Unions
Labor unions first started gaining a foothold in the U.S. in the late 19th century. The history of unions in the U.S. is deeply intertwined with the nation’s evolving economic and political landscape. From the post-World War II boom, when union membership surged and unions wielded considerable influence in securing wages and worker protections, to their steady decline in the face of globalization, automation, and shifts in labor laws, unions have both shaped and been shaped by broader economic forces.
In the early 1960s, we started to see public opinion turn against unions, as workers felt organized labor was no longer working in their best interest. The 1980s showed a slight uptick, as a reaction to Reagan’s free trade and immigration policies, but the decline was set in motion. As of 2024, union membership is near historic lows, yet there are signs of revival amid growing inequality and labor unrest. A large number of Americans feel they have been left behind in the modern economy, and they are looking for payback.
Offshoring
An offshoot of the Reagan free trade policies was the beginning of outsourcing as a significant economic factor in the U.S. It began to make strong business sense to build factories overseas, and ship the goods back, since the cost of labor was so much cheaper in developing countries.
Technological progress cannot be stopped. Slowed maybe - but not stopped. On the other hand, companies moving jobs overseas is seen as a conscious choice, and anti-American, by blue collar workers. The free trade policies of President Ronald Reagan, as laid out during his 1980 presidential campaign, set in motion a trend that many Americans have come to denounce. Free trade became the mantra of the Republican party, and eventually, most Democrats jumped on the bandwagon, as the majority of economists (conservative and liberal) maintained that free trade has more benefit than downside.
After more than a decade of structuring and negotiating, the North American Trade Agreement (NAFTA) was signed by the United States, Canada in 1994, and manufacturing workers were livid. Leading up to that, oil magnate and presidential upstart Ross Perot, managed to garner 18.9% of the vote. Which is enormous for a 3rd party candidate! Voters from that time can still hear Perot attacking the NAFTA legislation with his signature catchphrase delivered in a singsong Texas drawl - "Giant Suckin' Sound". To some extent, MAGA stems from that signature legislation. Donald Trump’s promise to put 100% tariffs (or whatever number he picks today) is a recipe for disaster, but it resonates loudly with his base.
Where to Now
As I stated at the beginning, there are a number of catalysts that have powered the MAGA movement. But I firmly believe that when people are feeling flush, they have no interest in burning the system down. Economic power leads to political power. When a large group feels they’ve lost economic power, they create political power by other means. The FBI has stated for the last few years that Domestic Terrorism from far-right groups is our greatest internal threat. Both sides of the political spectrum have been in this category before. Left-wing terrorists were the dominant threat in the early days of the cold war and into the 1970s, but the pendulum has swung too far in the other direction.
Something feels different about the period we are in. In the 1960s and 70s, Nixon popularized the term “Silent Majority”. At that time, the average American looked at domestic unrest brought about by the Civil Rights Movement, and Vietnam War Protests with fear and disdain. The general feeling is that they just wanted it to stop. Patriotism was their rallying cry, but they were not making too much noise about it.
Donald Trump has revived the “Silent Majority” moniker to describe his followers in recent years. Which is ironic, because they are neither silent, nor a majority. Along with economic grievances, illegal immigrants, completely unfounded accusations of election fraud, and broad-based targeting of anyone whose alternative lifestyle contrasts with traditional ideals of what it means to be an “American”, have been glommed together to form a giant bomb of political rage that seems destined to go off. Conspiracy theories, no matter how easily debunked, add even more fuel to the fire. There seems to be a relatively widespread dread surrounding the current political environment, which has culminated in around half of the country believing that a Civil War is possible in our lifetime.
Returning to the initial premise, from an economic and investment standpoint, one upshot from all of this is that American workers are likely to gain power in the coming years. Whether it is a fair assessment or not, many Americans from across the political spectrum believe the “American Dream” is dead, and the U.S. economy has become “Winner Take All”. Although their reasoning why differs, the upshot is clear. If the current distribution of wealth continues to widen, social tensions will continue to rise, and there will be hell to pay.
If Donald Trump returns to the White House, those in the MAGA movement on lower end of the socio-economic spectrum will become even more incensed than they are now when it becomes apparent that their circumstances will not be improved by whatever policies are implemented. The likely outcome to that will be a doubling down on authoritarianism and scapegoating. Such uncertainty has not begun to be priced into the market. Likely because too many investors still don’t understand what’s at stake.
Nice work Ryan!